Novartis in talks to take over Hexal

FRANKFURT: Swiss healthcare group Novartis is in talks to take over unlisted German generic drugmaker Hexal, German newspaper Die Welt reported on Monday.

The paper said the aim of the talks was a take-over of the whole Hexal group or a strategic part of it, saying that though the talks had progressed beyond early stages, they could still fall through.

Novartis and Hexal both said they would not comment on market rumours.

The paper said Novartis was not the only company interested in Hexal, adding that bankers pegged its value at 2.5-3.0bn euros ($3.24-$3.9bn), but that Hexal founder Thomas Struengmann had said earlier that this was too low.

Hexal is the second largest supplier of generics in Germany and analysts at ABN Amro said buying it would vault Novartis to number one position in the country.

"However, we believe the fundamentals of the German generic market are deteriorating, so any deal should be at a keen price," the brokerage wrote in a note to investors.

Industry analysts have long predicted further consolidation in the still fragmented generics drugs sector, following a wave of deals in the past two years.

With demand for cheaper unpatented drugs growing strongly and patent expiries creating new market opportunities, leading players in the fast-growing generics business are keen to expand their geographical and technological reach.

Novartis chairman and CEO, Daniel Vasella has made no secret of his desire to build up the Swiss group's Sandoz generics business through acquisitions.

Hexal had sales of 1.35bn euros last year, up from 1.1bn in '03. Its top products are copies of AstraZeneca Plc's Prilosec/Losec anti-ulcerant and Merck & Co Inc's Zocor cholesterol fighter.

Novartis has a potentially large warchest with some $14bn in net liquid assets, of which $7bn is in net cash. Hexal would therefore be a relatively small bolt-on buy.

Vasella said last month that Novartis remained "opportunistic" about consolidation in the drugs sector but had no major deals on its radar screen at present.

Vasella was rebuffed by European rivals last year, losing out to Sanofi in the Aventis bidding battle and being spurned by cross-town rival Roche Holding, in which Novartis has a one third voting stake.

Hexal, founded in 1986 by Struengmann and his twin brother Andreas, sells a large range of generics, and has been the subject of take-over speculation for many months.

Struengmann stated in an interview in late '03 that Hexal could merge with another generic drugmaker in the next decade in a move to establish a stronger presence world-wide.

Struengmann, who has four children, and his brother, who has two, have decided the children should be free to follow their own interests, and want to "de-Struengmannise" Hexal, he said.

He also stated in December last year that he was not actively pursuing plans to take Hexal public, though this remained an option.

The German generics sector, which generates sales of more than 4.4bn euros a year, offers high margins for drugs that are cheaper copies of patented ones.

Analysts say margins for generics in Germany are higher than in the United States because prices are fixed by healthcare authorities. Prices often fall by less than 30% when a drug goes off patent in Germany compared to 80% in the United States.